Unfortunately, the Indian market is one of the worst performers even among emerging markets

by Manas Chakravarty and Mobis Philipose

Most stock markets across the world have bounced back pretty sharply after the panic caused by the Bear Stearns Companies Inc. collapse. The Dow Jones Industrial Average hit a low of 11,650 on 17 March and it’s up 8.2% from there. The MSCI World index is up even more, gaining 8.9% between its closings on 17 March and 4 April.

Many traders believe the measures taken to bail out Bear Stearns and the expansion of the collateral acceptable to the US Federal Reserve to include mortgage-backed securities marked a watershed in the markets. The credit markets have certainly pulled back from the brink. In the US, the spread between mortgage-backed securities and treasurys has narrowed from 200 basis points (bps) on 12 March, before the Bear Stearns bailout, to 170 bps. An index of investment-grade bond spreads, which was 190 bps on 12 March, is down to 111. 30-year fixed mortgage rates have come down from 6.13% to 5.88%. Yields on safe haven two-year treasurys have also dropped. Sure, spreads are still very high, but at least they’re going down.

The improvement in the credit markets sparked a rally on Wall Street and in most other markets. Risk appetite too has bounced back, evident from the fact that the MSCI Emerging Markets index is up 15% since its close on 17 March. While some of that could be on account of the rally in commodities and crude oil, even the MSCI EM Asia index is up 10%, more than the rise in the MSCI World index. As fund flow tracker EPFR Global points out, “Asia ex-Japan Equity Funds enjoyed their best week of the year in early April, absorbing a net $599 million (Rs2,396 crore), as investors found some value in China and continued to commit fresh money to Taiwan in the aftermath of the 22 March presidential election. China and Taiwan Country Funds took in $377 million and $191 million, respectively, while Singapore Country Funds absorbed another $110 million.”

Unfortunately, the Indian market is one of the worst performers even among emerging markets. MSCI India is up a mere 3.4% since 17 March. Indonesia, which is down 1.2% since 17 March, is the other market left out of the rally. Incidentally, both countries have recently seen a spike in inflation.

One reason for the Indian market’s underperformance could be relatively high valuations. That’s also seen from the fact that although the MSCI China index is up since 17 March, the Shanghai Composite index is actually lower since that date. High price-to-earnings markets are not in favour.

Perhaps it’s because the MSCI India index has outperformed the emerging markets index over the last five boom years—its annualized growth rate has been 35.28% compared with 27% for the MSCI EM index and 24.19% for EM Asia. But if we are to pay now for better performance in the past, the question is: wasn’t the outperformance supposed to be a reward for higher growth and for the great India story?